Advertisement
Australia markets open in 9 hours 41 minutes

  • ALL ORDS

    7,831.90
    -100.10 (-1.26%)
     

  • AUD/USD

    0.6495
    +0.0015 (+0.24%)
     

  • ASX 200

    7,569.90
    -94.20 (-1.23%)
     

  • OIL

    81.23
    -0.70 (-0.85%)
     

  • GOLD

    2,318.30
    +15.40 (+0.67%)
     

  • Bitcoin AUD

    88,111.24
    -5,265.95 (-5.64%)
     

  • CMC Crypto 200

    1,195.04
    -144.02 (-10.77%)
     

Calculating The Intrinsic Value Of Fleetwood Limited (ASX:FWD)

editorial-team@simplywallst.com (Simply Wall St)
·4-min read

Key Insights

  • The projected fair value for Fleetwood is AU$1.64 based on Dividend Discount Model

  • Fleetwood's AU$1.44 share price indicates it is trading at similar levels as its fair value estimate

Does the April share price for Fleetwood Limited (ASX:FWD) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

ADVERTISEMENT

Check out our latest analysis for Fleetwood

The Model

As Fleetwood operates in the consumer durables sector, we need to calculate the intrinsic value slightly differently. In this approach dividends per share (DPS) are used, as free cash flow is difficult to estimate and often not reported by analysts. Unless a company pays out the majority of its FCF as a dividend, this method will typically underestimate the value of the stock. The 'Gordon Growth Model' is used, which simply assumes that dividend payments will continue to increase at a sustainable growth rate forever. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We then discount this figure to today's value at a cost of equity of 9.1%. Compared to the current share price of AU$1.4, the company appears about fair value at a 13% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

Value Per Share = Expected Dividend Per Share / (Discount Rate - Perpetual Growth Rate)

= AU$0.2 / (9.1% – 2.2%)

= AU$1.6

dcf
dcf

The Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Fleetwood as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 9.1%, which is based on a levered beta of 1.499. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Fleetwood

Strength

  • Currently debt free.

Weakness

  • Dividend is low compared to the top 25% of dividend payers in the Consumer Durables market.

Opportunity

  • Annual earnings are forecast to grow faster than the Australian market.

  • Good value based on P/E ratio and estimated fair value.

Threat

  • Dividends are not covered by cash flow.

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Fleetwood, we've compiled three relevant items you should explore:

  1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with Fleetwood .

  2. Future Earnings: How does FWD's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.